Tell me the rules and I’ll play the game

For my first 3 years of college I was an accounting major until one day I realized I really didn’t want to be an accountant. So I switched to business management and I have had zero regrets since, but that doesn’t mean accounting hasn’t been important to me over the years. Warren Buffet says, “Accounting is the language of business.” Today I deal with three different accounting firms on many levels but in the past my personal accountant always told me to just go make money and then we’ll figure it all out. And to a point he’s right. I learned that accounting is incredibly important, but at the same time taxes should really never stop me from doing something if everything else makes sense.

Now, most of us know there are three types of income: earned, interest, and passive. Since most of us on Bigger Pockets are Real Estate investors we tend to like passive income and rightly so. You can have passive income (passive in the eyes of the IRS that is because we all know that managing properties are anything BUT passive) and utilize depreciation and offset income with losses up to $25K (unless you’re a licensed Realtor, when this legal loophole is unlimited losses). This is a pretty good deal and the only other passive income that could be better would probably involve non-profits. That being said the next best type of unearned income is interest income. Now it is hard to hide this type of income but it’s still better than earned income with FICA and social security to pay.

As for earned income, which I normally try to avoid like the plague, there’s really not too many advantages I can think of other than you need some to put money in a retirement account or it makes it easier to qualify for a regular bank loan. But look at the bright side, if you paid 1 million in taxes, it means you made a few million! So there’s always exceptions.

Now that the 2012 presidential elections are over it will be interesting to see what the new rules will be. Several tax laws will be changing this December 31st. Just look at estate planning for example, if you’re planning to retire and liquidate some assets now might be the time since “the current law provides a generous $5,120,000 per person federal estate tax exemption and taxes estates over that amount at a top rate of 35%. This compares with a $1 million per person federal estate tax exemption and a 55% effective top tax rate scheduled to go into effect on January 1, 2013.”* And it looks like the Bush tax cuts will expire because “Mr. Obama promised to veto any deal that did not involve higher taxes for the wealthy,” according to the New York Times**.

When will all this uncertainty end? It’s too hard to play the game of business when you don’t know the rules. But it’s okay; once they figure these new rules out I’ll be looking forward to some strategic planning with my accounting firms. And hey, I could even write off accounting fees for all of these meetings!